Final answer:
An auditor may follow the audit trail in two directions during testing: vouching and tracing.
Vouching checks for overstatement by moving backwards from financial statements to source documents, while tracing checks for understatement by moving from source documents to financial statements.
Step-by-step explanation:
An auditor may follow two primary directions when examining an audit trail during the testing process. These directions are commonly referred to as 'vouching' and 'tracing'.
Vouching involves selecting items from the financial statements and following the audit trail back to the supporting original documents to ensure the recorded transaction actually occurred.
Conversely, tracing starts with the source documents and follows the trail forward to ensure that the transactions are correctly recorded in the financial statements.
Vouching tends to test for overstatement errors, as it verifies that transactions recorded have occurred and are valid. Meanwhile, tracing typically tests for understatement errors, ensuring all events that should have been recorded are indeed in the financial statements.
The choice of direction will be influenced by the auditor’s assessment of where the risks are more significant and the purpose of the audit procedure being performed.